What Is a Marginal Tax Rate?

Learn about marginal tax rates in this Howcast video with expert Gregory McGraime.

Transcript

Your marginal tax bracket is really important and I want to take just a few minutes to tell you what exactly it is. In our country we have a graduated tax rate and what that means is there are several different tax rates that may apply to your income. So for example maybe the first set of money I earn is taxed at the ten percent rate, and amounts above that are taxed at a fifteen percent rate, and so on, all the way up to our highest tax brackets. And that's what I mean by graduated, you're paying a little tax on different amounts depending on how much you earn. And the more you earn, the higher the tax bracket you're in. The marginal tax bracket is the highest tax rate that applies to some of your income. So for example, if I am paying a certain ten percent tax on the first group of income I make, and fifteen percent on amounts above that, and twenty-eight percent on amounts above that, twenty-eight percent would be my marginal tax bracket, the highest rate that I'm paying. Now the reason that is so important is because that can impact what investment decisions I make such as which types of bonds I buy, It can impact retirement savings decisions, such as saving in a 401K, or trying to take advantage of other tax benefits like flexible spending accounts that I may have through my employer. So your marginal tax rate, the highest rate that you're paying on your income impacts everything from benefit selections to investment decisions. And even to try and see how valuable certain tax deductions may be to you, and everybody should review their tax return, and if you have your taxes done by an accountant, you should ask them what marginal bracket their at. Most people I ask don't know the answer to that.